The following article will examine various duties of loyalty to a business that are owed by Senior Employees, partners, Company Directors, and mere employees using supporting legislation from the Companies Act 2006 and principles established from UK common law cases.
What is a fiduciary duty?
A common law fiduciary relationship arises where it is agreed that one individual:
a) will act on behalf of or for the benefit of another.
b) in circumstances which give rise to a relationship of trust and confidence.
Typically, A will have a degree of discretion or power over B’s best interests and, in turn, B relies on A to act in B’s best interests.
A fiduciary is expected to act selflessly and with undivided loyalty. It is the obligation to act in the best interest of others, which effectively distinguishes a fiduciary from a being an employee who owes contractual obligations. This is the main difference between a Company Director’s duties and an employee’s.
Fiduciary relationships arise in the following business relationships:
- Partners to partners.
- A Doctor to their patient.
- Service providers to their clients.
- Trustees to their beneficiaries.
- Directors to their companies (not members).
Fiduciary duties should not be confused with contractual obligations, although a fiduciary relationship may (but does not always) arise out of a contractual one.
Common Law Duties
Many of the common law duties owed by a Director to his company were implemented in statute with the introduction of the Companies Act 2006. However, only the most fundamental duties were included.
Duty to act in the best interest of the company (in good faith)
A Director has to act in good faith, and what he considers to be the best interests of the company at all times. Provided a Director can demonstrate that he has exercised his powers diligently and in good faith, a court will not interfere even if the court may have exercised these powers differently, as this is a subjective test taken by the courts when considering a Directors actions.
Duty to avoid a conflict of interest
A Director should not put himself in a position where a conflict or even a potential conflict could arise between the duties he owes to the company and either personal interests or other third party duties.
This duty extends to:
- Entering into contracts without giving full disclosure to the members and receiving their approval following a meeting (or as instructed in the company’s articles).
- The use of insider company data, client information or other opportunities accordingly.
- Competing with the company in any circumstances.
The application of these duties to “actual contracts” as well as “maturing business opportunities” was a significant extension of the law and, as a result, individuals may now legitimately be precluded from exploiting even the existing contracts of their former employers.
Duty not to make unauthorised profits
A Director must account for any profit personally earned as a result of his/her duties unless such profit was authorised by the members or was in accordance with the company’s articles. This is a strict duty and is not dependent on establishing fraud; bad faith or even the company suffering any losses.
Largely, statutory duties that employees owe to their company under the CA 2006 supersede the pre-existing common law rules and equitable principles. However, statutory duties are interpreted in the same way as the corresponding common law regulations and equitable principles Statutory duties are different to fiduciary duties as they are imposed on Company Directors only, (being discussed for scope of reference as opposed to relevance).
Section 171: Duty to act within powers (inter alia)
A Director should act in as per the company’s constitution; exercising powers only for the purpose or reason for which they are conferred. A company’s constitution includes any decisions taken by Directors in accordance with its articles as being regarded as a decision of the company as a whole.
Section 172: Duty to promote the success of the company
This has effectively replaced the duty to act in good faith in the best interests of the company, and holds that a Director must act in the way he considers, in good faith, and would be most likely to promote the success of the company for the benefit of its employees, partners and members in general: i.e for the company as a whole.
In doing so, the Director must consider:
- The consequences of any long-term business decisions.
- The need to nurture company relationships with suppliers and clients.
- The prestige of the company maintaining a reputation for high standards of business conduct.
- The interests of the company’s employees.
- The impact of the company’s operations on the environment.
Generally speaking, the duty imposed is subjective and ultimately depends upon the case in hand, however the employee’s bona fide intention will prevail over face value involvement in the case.
Section 173: Duty to exercise independent judgement
This duty looks at the current principle of law, whereby Directors should exercise their powers independently, without passing off their powers to the will of others, whether by delegation or otherwise. (Unless is fair to do so, or unless stated in the company constitution accordingly).
Section 174: Duty to exercise reasonable care
A Director should exercise reasonable care and diligence that would be expected of a reliable person with the general knowledge and experience that may reasonably be expected of an employee carrying out that level of work. Subsequently, there is both an objective and subjective test to be satisfied. It follows that where a senior employee has specialist knowledge, for example who is also a chartered accountant, the higher relative standard must be met.
Section 175: Duty to avoid conflicts of interest
To avoid a situation which has, or could create interest that conflicts with the interests of the company. This applies to the exploitation of any corporate property, information or opportunity (regardless of whether the company could take advantage of the same benefit or not).
Section 176: Duty not to accept benefits/bribes from third parties
A Director cannot accept a benefit from a third party conferred by reason of him being a Director or by any of his/her actions, or does not do, in the capacity of Director. However, the duty is not breached if acceptance of any benefit cannot be regarded as an act which gives rise to a conflict of interest.
Section 177: Duty to declare an interest in a proposed transaction or arrangement
If a Director is in any way, directly or indirectly interested in a proposed transaction or arrangement with the company, must declare the nature and extent of that interest to the other directors before the company enters into any transaction or arrangement.
Fiduciary Duties Owed by Senior Employees & Managers
In Tesco Stores Ltd v Pook, the Defendant was a senior manager who reported into the Board and was responsible for approving invoices. He approved fake invoices to exercise share options which had become exercisable using these invoices. The High Court found that there was an implied term that the share option was not exercisable as long as the employee was in breach of a serious duty (the duty to disclose).
The Court of Appeal concluded that the employee did owe a fiduciary duty to reveal Mr Pooks own misconduct as a result of negligence, however the duty only referred to the general duty to act in good faith; a fundamental equitable provision preserved in modern UK common law.
This case is fundamental in company roles and duty legislation, as it created a distinction between the duty to disclose owed by Directors and other fiduciaries; and the duty owed by ordinary employees. Where the individual is a mere employee, it is uncommon (but not impossible) to be found subject to a duty to admit ones own wrongdoing, as a result of negligence
Such employees may be under an implied contractual duty to report on other employees, however only when the circumstances arise due to the seniority of the employee and the nature of the employment that such duty could be implied.
Fiduciary Duties Owed by Mere Employees
It is important to recognise the distinction between fiduciary duties and the duty of fidelity which is an implied term of every employment contract. The duty of fidelity requires that during the continuance of employment, an employee will act in the employer’s best interests, and not use company time or resources to further any of his own interests.
This duty, therefore requires an employee to take note of an employer’s interests, without placing an employee in a position where he is obliged to pursue his/her employer’s interests at their own expense.
The importance of the terms of the individual contract have been reiterated by the Court of Appeal on numerous occasions which has confirmed that it is essential to focus on the substance of contractual duties owed by the employee, and to determine a case based on issues such as seniority, degree of independence and the level of trust conferred, whether a fiduciary obligation has been established from a common employment contract.